Summary of Articles in Business Economics, April 2007

By Robert Crow
Editor, Business Economics

April 2007 issue

“Housing Activity and Consumer Spending”
by Jonathan McCarthy and Charles Steindel

The current expansion has seen record-high levels of transactions in housing, extraordinary growth in the aggregate value of owner-occupied housing, and large increases in the amount of funds realized from the refinancing of mortgage debt.  Many analysts thus have pointed to the strong housing market and rising home prices as a major pillar supporting recent economic growth and have expressed concern that a contraction in housing activity and values could pose a significant risk to consumer spending and real economic growth.  This paper explores the channels by which the housing market may affect consumer spending and assesses the potential risk from a softening in the housing market.  Our assessment is that while a housing slowdown by itself may slow consumer spending some, it is probably insufficient to precipitate a downturn without some additional shocks outside of the sector.

“Dynamic Adjustments in Advance Pricing Agreements for Transfer Pricing”
by David Broomhall

This paper examines the issue of using past economic performance to benchmark transfer prices in advance pricing agreements (APAs) and explores methods that allow transfer prices to reflect current economic performance.  The paper applies these methods to the electronics industry and finds that capacity utilization provides a much better proxy for current economic performance than does the typical interquartile range of profits of comparable companies generated over some historic interval prior to the APA.  While taxpayers who benchmark results on capacity utilization lose the certainty of a fixed range, they gain by allowing transfer prices to reflect changing economic conditions.

The Propensity To Sue:  Why Do People Seek Legal Actions?”
by Frederick C. Dunbar and Faten Sabry

Tort costs as a fraction of U.S. GDP have increased over three-fold in the past 50 years, now hovering slightly above two percent.  Using a unique survey from the RAND Corporation, this paper empirically analyzes the perceptual and economic factors that affect the decision of an injured party to seek legal action.  We find that, independent of economic incentives, perception of fault is the most important factor in the decision to make a claim.  Unsurprisingly, the severity of injury—either as perceived by the claimant or as measured by actual injury during the accident—is another key factor in explaining the claiming rate.  Also as expected, there is a negative relation between age and claiming behavior.  Somewhat unexpectedly, whether the person has had experience with filing before has no independent effect on the decision to claim.

“Consumer-Driven Healthcare: Information, Incentives, Enrollment, and Implications for National Health Expenditures”
by Paul Hughes-Cromwick, Sarah Root, and Charles Roehrig

This paper highlights the importance of information for consumer-driven healthcare (CDHC), describes barriers, displays data on adoption rates and product features, and uses a new health modeling approach to investigate the potential impact on national healthcare expenditures.  It concludes with an assessment of the prospects for CDHC as a revolution of information, competition, and market orientation; and it discusses potential pitfalls, including concern regarding vulnerable populations.  While the jury is out on the ultimate effects, enrollment in CDHC programs—while still small—is growing rapidly; utilization and costs for subscribers appear to be moderating; and creative benefit structures emphasize health promotion alongside previously unseen cost consciousness.

“New Dimensions of Financial Liberalization in Japan”
by Masaharu Takenaka

This article contrasts the development of Japanese financial institutions over the past 50 years to that of the United States and compares the two countries’ household savings behavior.  Although reform and liberalization is driving the Japanese financial sector to become more open and more sophisticated, there are powerful reasons for the Japanese system and Japanese asset-holding behavior to remain divergent from that of the United States.  Since wealthy households are more sophisticated and better able to accommodate risk, the concentration of wealth in the United States means that, compared to Japan, there are more high income/high wealth households that are willing to take on risk from equity and bond holdings.  In Japan, in contrast, there is much more reliance on bank deposits.  Even though financial institutions in the two countries are becoming more similar, the persistent differences in income distribution are likely to lead to persistent differences in asset holding and the composition of capital markets in the two countries.

FOCUS ON STATISTICS: “New Monthly Hours and Earnings Measures from the Bureau of Labor Statistics’ Current Employment Statistics Program” 
by Robert P. Parker

The new measures are more comprehensive and are likely to be more accurate.